China manufacturing shrinks at faster pace amid cash crunch

Short-term expansion vs. long-term growth

China’s manufacturing is shrinking at a faster pace this month, adding to stresses in the economy and financial system after interbank borrowing costs surged to the highest in seven years.

The preliminary reading of 48.3 for a Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics compares with the 49.1 median estimate in a Bloomberg News survey of 15 economists. May’s final reading of 49.2 was the first below 50 since October, indicating contraction.

Manufacturing weakness, along with the money-market cash crunch, will further test how far Premier Li Keqiang is willing to go in sacrificing short-term expansion for more-sustainable long-term growth. After record credit in the first four months of the year failed to stoke growth, China’s State Council, led by Li, said last night that the financial system needs to do a better job of supporting the economy.

“If market rates remain at such high levels, the only scenario for the Chinese economy is a hard landing,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing. “That possibility is growing now -- it seems the leadership is deliberately taking a wait-and-see stance to see how low China growth can be.”

China’s one-year interest-rate swap rose yesterday by the most in five years as the central bank refrained from adding funds to thefinancial system, causing demand to fall at a government debt auction. The seven-day repurchase rate, a gauge of interbank funding availability, touched 12 percent today, the highest since at least 2006.

Financial Risks

Authorities will boost credit support for industries the government has defined as strategic and those that are labor- intensive, the State Council said yesterday after a meeting led by Li, without identifying specific sectors. The nation must also more firmly guard againstfinancial risks, and bank lending for projects in industries with overcapacity must be banned, the State Council said.

If confirmed July 1 in the final PMI reading, today’s level would be the lowest since September. The National Bureau of Statistics and China Federation of Logistics and Purchasing will release their own PMI survey, with a bigger sample size, the same day. The official PMI in May was 50.8, up from 50.6 in April.

The preliminary, or flash PMI, from HSBC is based on about 85 percent to 90 percent of responses from more than 420 manufacturers.

Factory Production

Industrial production rose a less-than-forecast 9.2 percent from a year earlier and factory-gate prices fell for a 15th month in May, while export gains were at a 10-month low and imports dropped.

At the same time, new-home prices rose at the fastest pace in more than two years in major cities last month, constraining the ability of policy makers to ease credit in response to weakening economic growth.

“Beijing prefers to use reforms rather than stimulus to sustain growth,” Qu Hongbin, HSBC’s Hong Kong-based chief China economist, said in a statement. “While reforms can boost long- term growth prospects, they will have a limited impact in the short term. As such we expect slightly weaker growth” this quarter, he said.

Yingli Energy (China) Co., a unit of the world’s largest solar-panel maker, said June 13 that it will slow investments to clear debt after facing anti-dumping duties in Europe.

Growth Estimates

Investment banks from Morgan Stanley to UBS AG this month cut their estimates for China’s growth in 2013, and Barclays Plc is estimating that expansion will slow to 7.4 percent, below the government’s full-year target of 7.5 percent.

Economists forecast China’s gross domestic product will expand 7.6 percent in the April-June period from a year earlier, the median estimate of 35 respondents to a Bloomberg News survey conducted from June 14 to 19. That compares with a 7.8 percent median projection in last month’s survey and first-quarter growth of 7.7 percent.